Wipro Limited (WIT) Q1 2007 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Wipro earnings call for the quarter ended June 2007. At this time all lines are in a listen-only mode. Later there will be a question and answer session and instructions will be given at that time (Operator Instructions). As a reminder, today's call is being recorded. At this time, I'd like to turn the conference over to Sridhar Ramasubbu. Please go ahead, sir.

Thanks Ken, and thanks everyone for joining us for Wipro's first quarter results and earnings call for the quarter ended June 30, 2007. Jatin, Lalit and Rajesh from the IR team in Bangalore join me in conveying our warm welcome to all of you. With us today we have Mr. Azim Premji, Chairman, Mr. Suresh Senapaty, CFO and other members of senior management team, including the BU Heads. I hope you have had an opportunity to review the Press Release we issued today morning under U.S. GAAP. Let me give you quickly the agenda for today's call. Azim Premji will share his thoughts on our performance and prospects. And Suresh will take you through the financial highlights of this quarter. As a reminder, when we discuss our results in today's call, some of the issues we discuss may be forward-looking. And I'd like to advise you that these statements may be subject to known and unknown risks and uncertainties that could cause actual results to vary materially. Such risks and uncertainties are discussed in detail in our filings with SEC. Wipro assumes no obligation to update the information presented during today's call. The call is scheduled for an hour. The entire earnings call proceedings are being archived and transcripts will be made available after the call at www.wipro.com. I'm online on email and if you have any specific questions which you are unable to ask, please send me a mail and we'll address those questions as well at the end of the Q&A. Now with that, let me turn over the call to Mr. Azim Premji, Chairman, Wipro.

Good morning to all of you all. By now, you would have seen and absorbed our results for the quarter ended June 30, 2007. While the management team would be happy to answer your queries, I would like to take some time before that to share some of our thoughts on our performance and our prospects. The results for the quarter are satisfying considering the strong headwinds faced by us in the form of appreciating rupee. Revenue from our Global IT Services at $726.1m for the quarter were ahead of our guidance of $711m. Our IT Services business continued to witness broad-based growth across verticals, geographies and service lines. Our growth in revenues was primarily driven by strong volume growth across our business units. Our differentiated services, Technology Infrastructure Services and Package Implementation, grew over 50% year on year, while Business Process Outsourcing and Testing delivered growth in excess of 40% year-on-year. Amongst our verticals we saw strong growth in Financial Solutions, Telecom Service Providers, Manufacturing and Technology, Media, Transportation and Services verticals. On the operational front we improved utilization by more than 400 basis points which helped us to partially mitigate the impact of rupee appreciation and additional sales and marketing investments. Our new client addition continues to be robust and we had a good set of wins during the quarter for our Technology Infrastructure Services, BPO and Package Implementation, including a multi-year total outsourcing deal of $130m. Our India, Middle East and Asia-Pac IT business recorded strong year-on-year growth of 51% and profit before interest and tax growth of 42%. Wipro Consumer Care and Lighting also grew well with a year-on-year revenue growth and PBIT growth of 35% and 32% respectively. During the quarter our Consumer Care and Lighting business took a big leap at acquiring Unza, South East Asia's leading personal care company. This is an important step for the business as we see large opportunities in emerging Asian economies. Unza has a set of strong brands, an excellent management team and overall is a great fit to our Consumer Care business. The growth rates they have achieved in the past are commendable and the profitability is amongst the best in the industry. Our focus in each of our businesses is to drive growth ahead of the industry growth rate and maintain margins at the top end of the respective segments. To achieve this we have been focusing on both organic and inorganic investment and our endeavor is to continue with this strategy. To sum up, the demand environment continues to be robust and we see good traction with our existing customers. We are investing in newer markets and service lines to drive growth. And that, combined with our focus on driving operational improvements, will help us achieve our vision of global leadership. I would now request Suresh Senapaty, our CFO, to comment on financial results before we take questions.

Good morning to all of you in the United States, and good evening to all of you in India and in Asia. Let me commence by highlighting the fact that for the convenience of the readers, our U.S. GAAP financial statement has been translated into dollars at the noon bank rate in New York City on June 29, for cable transfers in Indian rupees, as certified by the Federal Reserve Bank of New York, which was INR40.58 a dollar. Accordingly, revenue of our Global IT Services segment was $726.1m or, in rupee terms, INR29.4b. It appears in our earnings release as $725m based on the convenient translation. I will touch upon areas in our performance and financials that would be of interest to you all. Global IT Services revenues for the quarter of $726.1m, included $662.3m from IT Services and $63.8m from BPO Services. The sequential revenue growth of 5.1% in Global IT Services segment comprised of 4.9% growth in revenues of IT Services and 7.1% growth in revenues of BPO Services. Sequential revenue growth of 4.9% in IT Services was driven by volume growth of 6.5%, while blended pricing decline by about 0.2% quarter on quarter. On the foreign exchange front, our realized rate for the quarter was INR40.51 versus a rate of INR44.04 realized for the quarter ended March 31, 2007. As at period end, after assigning to the assets on the balance sheet, we have about $400m of contracts at rates between INR40.42 and INR45.72. As of June 30, 2007 a gain of INR350m relating to the changes in fair value of forward contracts and options, designated as hedge or forecasted transactions, is included as an component of other comprehensive income or loss within stockholders' equity. During this quarter we added 39 new customers, nine of which were Fortune 1000. The number of customers in the $50m plus bracket increased from eight to 10 during the quarter. While the number of customers in the more than $1m bracket increased by 19 to 281. Gross utilization improved by more than 400 basis points to 67% during the quarter. We have got a decent response from customers with respect to price increases. During the quarter we increased our sales headcount and spent additional dollars on sales conference and customer events. Rupee appreciation impacted margin by 340 basis points, which was partly offset by utilization and other operational improvements. Our BPO business delivered an EBIT margin of 22.6%, despite being impacted significantly due to the rupee appreciation. This was driven by price increases, the cost reduction initiatives in telecom and transportation costs and improvement in (inaudible) utilization. For the quarter ending September 2007, we expect volume-led growth with stable price realization. We will effect wage increases to offshore based employees during the quarter. We expect to offset the impact on account of wage increases through operational improvements. We will now be glad to take questions.

(Operator Instructions) And our first question this morning comes from the line of Joseph Foresi with Janney Montgomery Scott. Please go ahead.

Hello guys, a nice job here in a difficult quarter. My first question is your competitors have stated that the new focus here has been on sustaining net margins, given that the operating margins are going to come in due to the rupee. I was wondering if you guys had any thoughts on that in relation to your business.

Since you've brought up the issue of competitors, the way to look at it, vis a vis how the other competitors have communicated. When we are talking about an operating margin decline of about 2.2%, if we were to split that between operating margin and other income, the operating margin impact would only be 1%. The balance would be on the other income side. Because although foreign exchange impact has been 3.4%, if you do a split of that between the operating margin and other income, it will be about 2% and 1.4%. Against the 2% our operating margin decline is only 1% because we have been able to recover, through operational improvements, about 1 percentage points. So this is the overall impact. And going forward, we are going to give a wage hike effective August 1, which will impact about 140 to 150 basis points in the current quarter. And we think we will be able to mitigate that with a positive bias all so far as operating margin for the current quarter is concerned.

And just looking at revenue growth, it looked like Product Engineering was a little bit slow this quarter. Any comments on what's going on in that particular business? And can we expect it reaccelerate in the back half of the year?

Hello, Joseph. This is Ramesh Emani. The story on the Product Engineering we should see it from two perspectives. One is from the telecom OEMs and the other one is all other verticals. From telecom OEMs in some sense of a slowness what we have been seeing the past four quarters. We think we are reaching in some sense the end of that because we have seen, for the first time in this quarter, a positive billable growth in the telecom OEM market compared to a continuous negative in the last four quarters. So we think this should be -- though it is a small increase, it should be a good sign for us to work on. If I look at the other market segments, we have seen very good performance. And that is how you may say we have been flat in terms of the Product Engineering, otherwise, it would have been negative. Because we saw very good growth from the automotive and medical electronics business. Both of them have done very well in the last two quarters. Another slightly challenging area in the Engineering space is from the semiconductor equipment vendors. There, again, we are seeing a flat scenario. And these have affected our performance in the Product Engineering side. But, however, I do want to bring the very positive news from the telecom service provider segment. We have had a very good growth of about 14. -- some percentage points growth in that area. It is an excellent growth and we think that growth should continue.

Okay. And my last question here, just on the attrition rate. It actually kind of spiked up here a little bit for you guys. If you could just give us a little color on that and where you expect it to go, going forward? And thanks, guys.

Hello Joe, this is Pratik here. Our attrition in quarter one always has been -- it has seen a certain seasonality. And this year, in particular, we have seen a spike in the percentage of people who have gone for higher studies which is not very uncommon to see in quarter one, because all the admissions open up around this time for students who want to pursue higher studies. That's one. Two is, as Suresh was sharing a little while earlier, typically we have been effecting our offshore salary increases in the beginning of quarter three, unlike some of our own industry peers who do it at the start of the financial year. Which used to expose us and, to an extent, we used to be vulnerable on that count because of that gap. And that's one reason why we have advanced it and made it effective August. The third reason being that this is also a performance cycle, so we do a certain percentage of exit which happens because of people who fall in the quadrant where they have to be counseled out. Having said that, from where we are right now, we are definitely hopeful that in the coming quarter we should be seeing the number reversing.

Great. Thanks guys.

Thanks. We have a question now from the line of Julio Quinteros with Goldman Sachs. Please go ahead.

Thanks guys. Good evening. I just wanted to follow up on Joseph's question there regarding some of the slower performance in a couple of segments. Does that also relate to the slowdown on the U.S. side? I'm looking at a flat quarter-over-quarter result, as well as a deceleration of 26% growth in the March quarter to about 17% in the U.S.A. Is that also tied to the product side? Or is there something else going on, on the U.S. for you guys?

(Inaudible) as far as the U.S. is concerned the growth has been very good. We have seen a growth of about 7% sequential. And if you look at the previous quarters, in quarter four of last year we did about 8% sequential and quarter one of last year we've done about 6% sequential. So which means on a YOY basis we grew 35%. And for the full fiscal '06/'07 we grew 33% so far as the U.S. is concerned in dollar terms. So the shrinking that you're seeing is primarily in the rupee terms. But in dollar terms there has been growth of between 33% to 35% so far as the U.S. is concerned.

Okay.

Julio, I thought I will add to the previous question. This is Ramesh Emani again on the telecom equipment vendors market. We did indicate even in the last quarter analysts' call that we are going to see some uptake in that in the second half of the year and we still maintain that.

Great, thanks.

Thanks. And we have a question now from the line of Trip Chowdhry with Global Equities Research. Please go ahead.

Thank you. Again, congratulations on my end on a very execution in a very tough environment. I have two questions. The first one, let me put a comment and I'd like if Suresh can comment on it. I have been talking to many economists in India and what they are telling is Indian economy is growing between 8% to 10% every year and probably it will continue for the next 10 years. And that would, in a way, jumpstart the secondary industries in India, especially the infrastructure, roads, bridges and everything. And they need to grow between 10% and 20% every year. And because of that, the foreign investment in India will continue to occur and that will continue to strengthen the Indian rupee. And according to the people that I've been speaking to in India, they tell me within two to three years, expect the exchange rate, rupees versus dollar, to be around INR35 equals one dollar. I was wondering in that situation, say, two to three years out, if the Indian rupee does become, say, INR35 equals one dollar. Right now, I think around INR40 equals one dollar. Is Wipro positioning itself for that kind of scenario? And what is the worst case situation we can have in terms of operating margins? And then I'll have a follow-up question.

Good question you put, Trip. I think the issue here is most of the money that is coming into India is because India's story is a good story. Because a lot of infrastructure investments are happening and so on so forth, therefore, the money is coming in, in the form of FIIs, money is coming in the form of FDIs, private equity. And also to be able to facilitate this large investment that the Indian economy needs, also in the form of external commercial borrowing. But what we've seen over the last one year is the size of the external commercial borrowing that has been coming in is substantial. And while some of the projects for which this commercial borrowings are brought in, takes a longer time for the money to be spent. For example, there are environmental clearances. There is land that you need to acquire to set up and use that money. So if the dollar is coming in with a view that the dollar gets spent, you wouldn't have that surplus money -- the surplus dollar which could impact the rupee. It is only because in the current situation the going is good, a lot of dollars are coming in but the spends are not at the same rate -- pace at which it is coming in, it is having this particular impact. And I'm sure there are a lot of discussions that is happening in the Reserve Bank of India and the Ministry of Finance that we're going to plug this, whereby, these extra dollar getting converted into rupee and putting pressure on the rupee to appreciate, whereby, the export becomes non-competitive, will be avoided. Some of the discussions are happening. We are looking forward to some of the policy decisions in the near term that are likely to come. So, net net, as and when the procedural obstacles get removed in the form of environmental issues or the land issues etc. etc., the dollar that will be coming in for project financing will get spent. And, hence, it will not impact the rupee flow, the rupee as we have seen in the past six months, past three months particularly. And also earlier the Reserve Bank of India was using to buy dollars but because of the inflationary conditions that the Government of India has seen there was a hold back with respect to this particular aspect in the last three months. And, hence, we are seeing this particular situation. And, therefore, on a medium to longer term we do not think the dollar would come into India without being spent in the form of infrastructure and projects. Therefore, the pressure will not be more than what the GDP growth of the both economies delta is reflected only in the exchange and nothing more than that.

Perfect. A follow-up question is regarding the tax holidays. Any update from the government policy regarding tax holidays? And also when you are conversing with the Finance Ministry in India, are you getting a sense of any change in financial policy of the Indian Government? Because there has been a lot of chatter in the political circles, like the ruling party did lose some elections. And because of that the focus of financial policy will be catered towards the farming sector. And anything you can influence so that it doesn't -- the Indian Government doesn't sidetrack the IT sector. And that's all. I know they are difficult questions. If you don't want to answer those, feel free to not answer. That's fine. But all the best for a very good execution.

Suresh, why don't we answer him on a one-to-one basis? Their SUV (ph) policy very much continues. They've surpassed or again starting to get authorized and approved. So not only are individual companies getting SUV approvals, but also parts where the companies do not set up individual SUVs are also available for companies to go into the SUV. So continuity of some of the exemptions which the industry is seeing today is likely to continue, assuming industry jumps onto those SUVs, as most of us are doing.

So therefore, bottom line, no change in the tax policy we're seeing. And so far as the focus on the other parts, farming, etc. etc. is concerned, more and more people are thinking that the economy is already in autopilot mode.

Okay, thank you.

So they're not requiring any government support for it to run.

Thanks.

Now we will go to the line of Moshe Katri of Cowen & Company. Please go ahead. Moshe Katri - SG Cowen & Co.: It's Moshe Katri with Cowen. Good execution, good quarter. A couple of questions. First, can you talk a bit about pricing? I think, sequentially, pricing was down I think -- roughly 100 basis points, talk a bit about some of those factors? Maybe talk a bit about your ability to raise bill rates on existing and new engagements. Has anything changed since the last quarter? And then maybe you can also talk a bit about some of the levers in your model. You did say that you expect to be able to offset the fact that you will be raising wages next quarter. And finally also maybe also talk about the competitive landscape. Thanks.

Right. Before I request Sudip Banerjee to explain the pricing front, just to say that the quarter one we saw a 20 basis points reduction in the pricing. And that also is on the coupon rate but primarily for the for the mix of customers that we have. So with that particular correction, I would request Sudip Banerjee to answer on the pricing environment.

Yes Moshe, this is Sudip. Let me just take the first point, which is on pricing. I think in the last six months we have seen pricing steadily moving up at a rate which has been faster than what we have done. And in the last three months, after we have seen the impact on account of the appreciation, we have gone back much more aggressively to all our customers for increases in different ways. So increases in the coupon rates, increases by converting a lot of more projects into fixed price and, thereby, increasing the realization on them, increases in terms of also looking at certain areas which we were a little lax on in implementing. For example, when a person was moving from one category to another category of experience, which is how the price will be structured, we have in the past not immediately gone and realized those. But those have all been actions which we have taken. Much of the flow through of those will be seen in the coming quarters. We are also aggressively going to get, with many of our customers, ad hoc price increases and have been successful in a few cases. Coming to the competitive environment, the competitive environment continues to be strong. We have good competition from the global players who are now actively engaged in the same deals that we are pursuing. We also have the local Indian peers with whom we continue to compete. But the good news is that the momentum in the marketplace is very strong. And that's seen in the number of deals that are going on, the number of customer visits that are taking place, the number of RFPs and RFIs that we are responding to. So, overall, we see a very strong environment as we head into quarter two and beyond. Moshe Katri - SG Cowen & Co.: You've also indicated that you're planning to offset -- you're going to be able to -- should be able to offset some of the wage increases next quarter. Talk a bit about some of those levers in the model?

In the current quarter we have utilization improvement by 4%, so 400 basis points improvement. We think there's still headspace in that area. That is one lever. The second lever obviously we talked about is pricing. The third lever that we have on the operational side is more fixed price contracts to be executed ahead of time. The fourth lever that we have is on the mix of people that we use for projects, which we refer to as the bunch mix which is basically the number of people who have a lower experience but who could do the same job and who come at a lower cost. So we are using all those operational levers to make sure that we will offset the wage increase which will be approximately about 140 basis points in the current quarter. Moshe Katri - SG Cowen & Co.: Thanks.

Next, we go to the line of Mark Marostica with Piper Jaffray. Please go ahead. Mark Marostica - Piper Jaffray & Co.: Thank you and a good morning, or good evening and a nice job on the quarter. A question regarding attrition. How much of the attrition this quarter would be in the category of forced attrition?

About 1.4%. Mark Marostica - Piper Jaffray & Co.: Okay, great.

What we call involuntary attrition. Mark Marostica - Piper Jaffray & Co.: And then your comment on the mix of inexperienced people being a driver to offset the wage inflation. Can you give us a sense of the mix of newer people, or freshers, in the quarter versus where you were at year end?

Last quarter we had more than 80% of the people we hired which were net hires which were campus hires. And in the current quarter also we have substantial campus people who will be joining in the current quarter. So that also will be a significant component of our net hires. So, like this, over a quarter over quarter we should be able overall able to improve our mix much better. Mark Marostica - Piper Jaffray & Co.: Okay. And then the other question that I had is regarding your comments on utilization. What do you think the sustainability of the current levels of utilization are? It sounds like you think you can make then even go higher. I'm curious on your thoughts there. Thanks.

Yes, we think that there is still headspace on the utilization front. Our current utilization, without the support headcount, is roughly about 74%. And we think that there is some more space -- headspace in that area. Mark Marostica - Piper Jaffray & Co.: Thank you.

Our next question is from the line of Ed Caso representing Wachovia. Please go ahead.

Hello, Ed Caso, Wachovia. My question revolves around your ability to get H1B and L1B visas. How are you sitting for the next year or so? What's the latest update you've heard as far as levers, both in India and in Washington D.C. that would maybe correct the long-term issue.

This is Pratik here. The line was a little faint so correct me if I have not got the question right. Your question primarily is around how are we tackling the H1B visa issue?

The first part is do you have adequate supply and access to H1 visas over the forward 12 or 18 months? And then what efforts are the industry doing to deal with this issue?

Okay. On the first part of the question, obviously, this time the number we had applied for and against that the number we got was lower than what we would have hoped for. But given the fact that we have some inventory of H1B available with us, I think we are fine for this particular financial year and we should be able to manage without any hiccup there. On your second part of your question with regard to what is the industry doing, that's something which, as an industry group, we have been trying to work out with the people who can possibly influence and eventually take the decision on the need for this to enlarge. And there is an absolutely clear requirement and a demand. We saw it happening this year as well where, right on day one and within a week of that, all the applications got consumed. The second part of our own strategy which is specific to Wipro, we do believe that as an organization we cannot be having a model which is so overly-dependent on visas alone. So what you would tend to see going forward from Wipro's end is that we will begin to engage with -- on a selective basis customer led, hiring local employees in the geographies where we operate. And it's not restricted to just one country. It would be across in Europe as well as in the United States.

Could you talk a little bit about the acquisition --

This would be displacing the employees we depute from India in terms of H1B visas. So, net net, it will not add to our cost structure. I think it's important to realize. Because some of the locations also which we are now locating to set up development centers, which hire local college students. And when we train them through our system and then take them back there, are regions which are not part of large cities but are smaller cities where the states are very eager to create employment and, therefore, are willing to give us quite substantial support in terms of funding part of our requirements for headcount in terms of support.

My other question is around the acquisition intent, that you just made a large acquisition in the non-IT area. I was wondering if there was a change in the strategy at the top of the house to maybe move away from the IT and BPO as far as acquisitions were concerned.

No, I think our strategy is we're in the Global IT business, we are in the Indian IT and Asia Pac business, we are in Consumer Care business and we are in the Infrastructure Engineering business. We are in these businesses only because we have a leadership status. We will continue to maintain that leadership status and grow. And our objective is to be present in these businesses and grow faster than the industry growth rates that we have there. And Consumer Care has been, as you know, our traditional business, how we started the business and Company. It has been doing pretty well. It has been growing in excess of 35% for the last two to three years. And a part of our strategy was to take this part of the business beyond Indian territories. And with respect to that we thought this was a good acquisition to be able to broadband. However, overall still if you look at the non-IT part of the business, it's still not very significant with respect to the total Wipro Corporation. Just to give a little bit of highlight, Mr. Vineet Agarwal will give you a little bit of insight around this particular transaction.

Vineet is our President of Wipro Consumer Care and Lighting.

Good evening. Our Consumer Care and Lighting business has grown 33% in this quarter and last year we grew at 36%. Our return on capital employed has been 42%. So, to that extent, it's been a cash generating business and grown well ahead of the industry; at least two times the industry for the last three years. In terms of the acquisition, the Unza acquisition, the brand, the size of the acquisition is about $153m. It is a sizeable company with presence in -- critical presence in five countries like Malaysia, Vietnam, Indonesia and China. And you would know that Indonesia, Vietnam and China are faster growing economies than other parts of South East Asia. So, to that extent, we expect that this would continue to grow faster than the industry, even in South East Asia. In terms of operating margin, the Company has an operating margin of 12% which is in line with other FMCG companies in South East Asia.

But just we want to -- we have declared that we want to continue to grow in the IT business, but this growth is not at the cost of the IT business growth. IT business will be growing organically as well as inorganically, as has been our strategy so far and it will continue to be like that.

Thank you.

Now we will go to the line of George Price. Please go ahead, representing Stifel Nicolaus.

Hello. Thanks very much. First of all, I was curious, what was the impact to rupee-based revenue from currency?

It is INR2,570m which is equal to 8% of our revenue.

Okay. And in terms of the pricing increases that you've discussed, how long will those pricing increases take to roll through your book of business do you think? What's a reasonable -- on an annualized basis, what's a reasonable pricing benefit that we should expect?

It's difficult to give a specific guidance on pricing per se, but we can tell you that, based on the past experience, we have been able to get customers at better pricing than we have at an a WP average level. And also our secret of ability to take prices up at the phase of renewal has been decent, apart from what my colleague, Mr. Sudip Banerjee, has stated that there has been some few cases where we have gone to the customer out of turn and customers have responded favorably for us to be able meet with this challenge. We are seeking more and more such support, more and more such positive responses from our customers, to be able to deal with the situation that we faced in quarter one with respect to foreign exchange, rupee appreciation. And we think, over a period of time, we should be able to mitigate the entire disadvantage that we went through in quarter one.

Let also, Kurien, who is our Chief Executive of our Wipro BPO business, give you some fit in terms of how we are tackling the pricing problems in Wipro BPO because there -- because the business is almost completely local in terms of our P&L account, in terms of expenses. The EBIT is even more than it is there in the Software Services.

Hello, this is T.K. Kurien. So let me just give you a quick run-down of what we've done in the BPO business. The impact on the top line of a 9% appreciation on the rupee would really translate into 7% in terms of operating margin. So what we have done is, we've done two things. Two years ago we started changing our mix of services and we began to sell more and more integrated deals. At the end of last quarter, we were at 37% in terms of our integrated deal percentages as a percent of the total top line. And that in turn brought about significantly better pricing. The second thing that we have done in the back-end is that we have worked on our utilizations and our -- our seat utilization. And having said that, even though we've improved our seat utilization by roughly about 6 percentage points, what we have done is that we have also increased our bench size to take care of future business going forward. So while our bench has gone up by almost 900 people, that is our training bench, our seat utilization -- our utilization has actually offset the cost of the training bench. In turn, what we've also done, is that we've also done a significant amount of work in terms of cost reduction. We've centralized a lot of costs at the back-end. And we have managed to drive significant productivity just in terms of cost, both on some of the large infrastructure costs we have like telecom. We've also, on a selective basis, gone back to customers and got price increases. And our view is that wherever you have a -- wherever the customer is willing to listen to a price increase scenario, it means that you're delivering value to the customer. So we have really utilized that to the hilt. And most of our customers have been pretty receptive to the price increase whenever we've asked them for a price increase. So that's pretty much what we've done. Net net, on an Indian GAAP basis, we have managed to reduce the impact down to a little more than 1.6%, and on a U.S. GAAP basis about 2.4%. That's really been the impact to our bottom line. But if you look at the other BPOs that have declared results, until now our operating margin is probably the highest.

Can I just, one follow up, just because you made the comment about talking to your customers and them being generally receptive. Can you comment broadly on how receptive your customers are to pricing? And if they are more or less receptive, I guess, when you're talking to them in terms of pricing driven by wage costs and availability of resources versus -- I don't know if you've gone back to them and also said, hey, currency is moving against us. Maybe you have, maybe you haven't, but are they more or less receptive to different issues when you go back to them on price? Thanks.

Well, I can just talk to the BPO piece of the second and I'd ask Sudip Banerjee to respond to the IT component. But what we have seen, at least on the BPO side, is that if you go back to the customer and tell him that the dollar has moved against you, that's normally not a very good reason to get a price increase. Fundamentally, it has to be driven by performance, it has to be driven by value and it has to be driven by the fact that you are facing competitive pressures that can affect the customer's business. I think that's normally the rationale that you would use. The dollar movement against the Company itself is not necessarily a very good reason to go ahead and ask for a price increase. And you can ask for it; you may not necessarily get it. So it has to be driven by value, it has to be driven by comparatives, compared to the other -- your competitors. And it also has to be driven, ultimately, by the cost pressure that you see that will affect his deliveries. I think those are the three things that we see at least in the BPO business.

(Inaudible). Girish, do you want to give some comment on prices? Girish is our President of Financial Solutions.

Hello, Girish here. I think Kurien summarized it, that ultimately it's people retaining people and the cost pressures that have come because of wage hikes which are the easiest ones to convince clients on. And we are there, of course, doing higher quality work and getting more value added in it, assuming some amount of risk in outcome-based engagements.

Okay, great. Thank you very much.

Thanks. And we have a question then from the line of Ashish Sajani -- Thadani, pardon me, with Gilford Securities. Please go ahead.

Yes, good evening. I was wondering if you could comment on the likelihood that the work week may be extended to counter some of the prevailing margin pressures and to what extent?

I know there has been -- this is Pratik here, Ashish. We have heard reports of similar things in the papers. We just want to clarify that there is no such move which either is being contemplated or has been done. In many instances where we do end up working, and working additionally, those are completely customer-led situations around certain deliverables. But, otherwise, that's not something which is on the cards any time in near future.

Okay, that's helpful. And it also appears that there was a fairly significant ForEx loss of about $21m. Could you explain how that came about in this environment?

Yes, I think the very fact that the rupee appreciated by about 9% against a INR44.04 that we got in quarter four, 3.5% in quarter one. So that's a significant drop and that has impacted our margins by about 3.4% including the translation and the hedges. So, net net, more than about 1% has been recovered through the operational exchanges, so that impact was only 2.4%.

Okay, that's --

And also I would like to say that, Ashish, compared to many of our peers we have a capital hedge accounting. So we have about INR350m in the OCI in the balance sheet which then flows to our P&L in those quarters in which that transaction has been forecasted for. So companies who do not have this kind of an accounting would have traditionally put this into the P&L, and that would have an impact of about 1.1%, which means if we were not to be following cash flow hedging, the profits will go up INR350m, which will improve the operating margin by about 1.1%. And the third leg is that, in quarter four, our utilization per dollar was superior to some of our peers and that itself also had an advantage of about 0.5 percentage point. So all in all, if you take into account that 0.5%, or 50 basis point of advantage in quarter four and about 110 basis points of (inaudible) OCI that we're carrying through, that is about 1.7%. So if you net that all 3.4%, that is about 1.7% which is similar to some of our peers have delivered.

Okay. That certainly explains it. And finally, it appears that the tax rate might have been a little lower than certainly what we were projecting. Was there any unusual item and what should we look for in future periods?

You can look for the similar rate as what we have seen in quarter one, with 1 or 2 percentage variation.

Okay. Thank you very much. Good luck.

Thank you.

Thanks. And we're showing a question now from the line of Samad Masood with Ovum (ph). Please go ahead.

Hello guys. I'm really not wanting to focus on the financials too much. I really wanted you to give me some understanding as to why your performance was so out of line from that of Infosys and TCS in particular, in terms of both top-line and bottom-line growth. I'm particularly interested in the top-line growth being significantly lower than I'd expected, but also significantly lower than the other players. I understand hedging strategies might play into this a bit, but you also mentioned that, and I just wanted to check this, that you've seen a 20 basis point reduction in pricing over this quarter. This is in a quarter which your -- those two competitors saw a 3% to 5% increasing in pricing. I really need to understand what's going on here.

Right. First of all, if you remember we had given a guidance of $711m. We delivered about $726m, which is about 2 percentage points better than what we had guided. Also if you look at the growth that we have seen in the Enterprise, 42% YOY, and in the Financial Services we have got 43% YOY. And in the Telecom Service Provider space we have got 45% YOY. In the Product Engineering space that we talked about, and particularly in the two segments which is the telecom equipment and the semiconductors which are soft, and the semiconductor was soft. But so far as the telecom OEM is concerned, it is nothing to do with the market, it was to do with the reorganization of few -- four large companies over the last six months which took time. And as of now, we think that is settled and we think we can see much more interactions now and visibility of projects, but we think most of that growth would come in the second half of this fiscal. And that is about 34% of our business, which means 66% of our business has given us growth in excess of 40% YOY. And in quarter one, we have delivered 5.1% sequential growth, despite almost about flattish Product Engineering growth, which is 34% of our revenue. And we also have -- and the guidance we have given is $777m dollars which is about 7% sequential. And that is emerging from the fact of the wins that we have seen in the last quarter. For example, the $130m order that we talked about from the large utility company in the United Kingdom, some large wins that we got in the Enterprise Application Services space. Telecom, there is the technology Infrastructure Services space and many other fundamentals that we are talking about, about 10 to 12 large deals we are working on. So all that gets factored into this $777m with a 7% sequential growth that we're talking about in quarter two.

So if I could just confirm that, because the line isn't perfect, the reorganization among clients in the semiconductor space has held you back. You already mentioned that you saw a softer than normal market in telecoms and you expect an increase there. That applies to telecom equipment manufacturers as well I'm assuming?

That's just a rumor. There's a softness in the semiconductor space and there is the reorganization in the telecom equipment manufacturers' space.

Okay.

Telecom Service Provider is doing well. It has given us 45% year on year in quarter one.

Okay.

And 20% sequential growth.

Okay. And your operating -- your profits growth was pretty low. Is that mainly to do with this issue as well, or the rupee appreciation, or could you give me a bit of an explanation there?

Sorry, did you talk about -- what is that you were talking about, the profits?

Your operating profit was very, very low, yes.

Exactly. Profit was hit primarily because of the dip that we saw on account of foreign exchange impact in quarter one.

But primarily from foreign exchange?

And also in quarter four of last year we had a tax rupee write-back of about INR740m (inaudible). INR740m. So if you correct for that, then the decline is much more moderate. Then the current quarter, that is quarter one, there are no write-backs. Unlike many other peers have write backs, in our case this is no write-back. It is a clear normal tax of about 10.8%.

Okay. And you mentioned the utility deal in the U.K. Is that with an existing client, or was that a new deal because it is quite impressive to have signed up a multi-service deal with Infrastructure Services included as well.

Well, always the large deals are also won in the existing account. While sometimes it could be completely, completely new account but always an existing account where you will win, because you start with a small project and you keep doing bigger projects.

So can I, just to recap, by the second half of this year you should be back on, can we say, normal operating performances as we've seen in previous years, because it's --

In the Project Engineering space, yes. In the Project Engineering space we're looking for better recovery in the second half, but our Financial Services, Telecom Service Provider space and other verticals that we talked about will continue to see us through over quarter two and rest of the year is concerned, including the BPO business which has got a sequential growth of 7.1% and that gave us 40% YOY. So all our practices have grown pretty well between 60% and 70%, whether it's Telecom, Infrastructure Services or Testing Services or Package Implementation Services. And another (inaudible) factor I could say is that in the case of Wipro Infotech, which is our Indian IT business, we tend to peak in quarter four. Quarter two and quarter four are very good quarters. So from that perspective, when you see the change delta from quarter four to one, the profit has dropped there and that is a traditional one. But on the YOY basis it has grown 60% -- 64%, and there we're going to get 52% in operating profits.

Okay. Thank you very much.

Thank you.

Thank you. And we have a question then from the line of Anthony Miller with Arete Research. Please go ahead.

Yes, hello again, gentlemen. I'd just like to come back to the attrition issue again. You gave some reasons why attrition typically trips up on this quarter and that is the case in previous years, although to a much lesser extent. A couple of years ago it went up from 12% in the fourth quarter to 13%, and last year from 16% to 17%. This year we have it tripping up from 17% to 20%; that was the biggest leap we've seen and the highest level we've sustained. Can you help us understand where this excess attrition has come from? Is it a particular level of experience, is it coming from particular service line or a particular vertical? And can you also help us understand why you believe, why are you confident that attrition will come down again when the salary increases that you'll be giving next month are really just in line with the rest of the industry. Thank you.

Anthony, this is Pratik again. So let me answer your question in three parts. The first one is where exactly are we experiencing attrition. The attrition is largely in the experience band of one to three years, which is fairly typical what we get to see in the industry. More specifically, where are we seeing, and the certain segment is -- segment, there are certain practices where we get to see the attrition happening more and this is around some of our Infrastructure Services and Enterprise Application Services where it seems to have peaked. To your third part of the question, why should it -- why are we confident. One reason which I have shared in the morning call, as well as a little while earlier, that we did see a fairly high percentage of people who went for higher education which would not be a factor from quarter two onwards, which we have to -- which gives us the reason to believe that that would be out of the way and would help in bringing it down. That's one. The second one is that, even though it's just at the same level where our peer companies may have given the increase, if we had not done it that gap would have remained for another couple of -- at least another quarter. And to that extent we would have continued to be vulnerable. So this has helped us in bridging the gap, so at least it's a level playing field. Now with all that which I have spoken, there is some amount of work which we, as managers and leaders, will have to do because I would not like to merely park it saying it's around these reasons alone. And I think our leadership is fairly conscious of the fact that there are other opportunities how we could be bringing it down with more intense employee engagement. And that's already a work in progress which also makes us believe that that will also help us in bringing it down.

Yes. The odd thing is, if you look at the history between the first quarter and the second quarter in the last couple of years, attrition actually goes up. You say it's people going to higher education which, of course, affects all players, not just Wipro and the others have not been affected like you, but it's particularly --

Exactly. So, if you're talking about -- I don't know what's your basis for comparison because not all companies compare it exactly the same way. So what we declare as the attrition number is a quarterly number which is analyzed for the year, as against others who do it on the last trailing 12 months. It's our belief this is more reflective of where the attritions are. Having said that, yes, the reality is the percentage attrition figure numbers are about 3 percentage points ahead of where we were in the previous quarter. And the reasons we have analyzed, and what we have shared, and the actions are something which we are putting in place. So we are hopeful that we should be able to bring it down.

Okay. Thank you very much.

Yes.

Thank you. And we are showing a question now from the line of Kanchana Vydianathan (inaudible) with Pacific Crest Securities. Please go ahead.

Hello, thank you. I actually had a follow-up question with respect to the Engineering Services. I was wondering if you could give some color on -- are you seeing increased competition with the captive R&D centers in India?

This is Ramesh Emani again. I don't see there is any change in terms of the competition we have with the captive R&D centers in India. We have been, in some sense, competing and also working together with them for the past five years. So in that sense there is no change. The main change -- again, to amplify in terms of the telecom market, what happened is some of our large customers in the telecom market, you know essentially some big customers who were close to 80%, 90% of the business, they have gone through a phase of reorganization because of the huge mergers and acquisitions that have happened. And that did have an impact in terms of their product plans and their R&D budgets were being rationalized as their products were being rationalized. And that is where we have seen the impact. And now that the acquisitions -- the M&A have settled well, we think, and we are seeing, a change in the scenario.

Okay. One question with respect to the Infrastructure Services. You did mention that -- if I were to look at it year on year, it's about 56% growth, but on a sequential basis it's only about 1.5% growth. I was wondering if you could comment on that as to why is there a decline -- is there a muted growth in this offering.

Yes. This is Suresh Vaswani speaking. I would -- if you really look at the mix of our Infrastructure Services business, it has a large proportion of annuity business, but it also has a fair proportion of system integration business. So, yes, this I would say it is pretty much a quarter aberration which is related to some of our projects being completed and, therefore, there has been a ramp down in terms of execution and completion of some projects. So really the true benchmark is the YOY growth which I think we've delivered a fairly strong performance at 56% YOY growth.

Okay.

Okay.

And one final question with regard to --

I just also want to add, for example, I just wanted to add one more point. In terms of the solidity of our Infrastructure Services business and in terms of our wins, we've had a strong win in the infrastructure -- largely in the Infrastructure Services space which is a win that was spoken about earlier. The utilities, the U.K. utilities, $130m five-year deal. It has been largely an Infrastructure deal. It comes under the realm of our total outsourcing offering, but really it was led by the Infrastructure Services piece. There is a large portion of Infrastructure Services in that deal.

Okay. That's helpful. One final question with respect to, I guess, if I were look at campus hiring, as you're going back on campus now to hire for fiscal 2009, I was wondering if you could give us any information. Are you looking to hire more people from campus as opposed to laterals for fiscal 2009; any color on that?

Yes, most certainly. So the season has already begun. And to the extent we can gaze at the crystal ball and predict, I certainly think that the numbers would be higher than the number we would be having joining this year. It's also part of our own attempt to make sure, as the overall employee mix, we bring in more people who belong to zero to three year experience. So this currently is at 45%. We think by end of this fiscal we should be close to about 50%, 51%. And we have enough head space to take it further if we continue to bring in more freshers.

Okay. Great.

Thank you.

Thanks. And at this time I'm showing no further questions in queue.

Great. Operator?

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